Going forward, the Company has established a policy for the preneed cemetery trusts in these two states of withdrawing monthly the investment income now being generated from the trust portfolios, which is estimated to be approximately
"I look forward to reporting our second quarter results in a few weeks. Even before this good news, we had established a Consolidated Free Cash Flow Outlook for 2011 of approximately
"I am also very pleased to announce that we are entering into a new
CARRIAGE PRENEED FUNERAL AND CEMETERY BUSINESS STRATEGY
The business goal and purpose of Carriage's preneed funeral strategy is to defend and grow future market share by offering client families in the communities where we operate an opportunity to lock in today's prices and to preplan and choose the products and services that adequately commemorate their lives without the distress of an imminent death. The financial strategy related to our preneed program is to prefund preneed funerals using either a trust or third party insurance product whose investment return growth over time will exceed the increase in delivery costs at the time of death in order to sustain and protect our gross profit on the sale.
As a matter of business strategy, Carriage has elected to have its preneed funeral strategy either aggressive, moderate or passive depending on the unique competitive dynamics in each market. We have generally aggressive preneed funeral programs in markets where we have aggressive programs being used by competitors, which only occurs in a small percentage of our stand alone funeral markets. Instead, we have emphasized decentralized management and an emphasis on atneed market share gains and the maintenance of pricing power which have been the major performance drivers of our Standards Operating Model and five year same store volume and revenue trends. We believe our business strategy and Models have produced long term same store volume, revenue and sustainable Field EBITDA Margins (cash earnings power) that are unmatched by any other consolidator, public or private.
Approximately 20% of our total funeral volumes and revenues have been presold, with about 8% of total funeral revenues represented by presold trust contracts and about 12% by presold insurance contracts. Our preneed funeral revenue and earnings represented by trust contracts have been increasing more rapidly than those represented by insurance contracts (generally a 2-3% growth factor) because of the excess realized net gains (over losses) and much higher recurring income as a result of our successful trust fund repositioning strategy during the 2008/2009 market and financial crisis. Nevertheless, our recognized preneed funeral trust revenue and earnings have greatly lagged the actual preneed funeral trust performance, especially in 2010 and the first six months of 2011, because our accounting methodology requires a death (delivery) to occur and the related cash in the trust to be withdrawn before revenue and earnings are recognized.
The cemetery business is different from the funeral business in that the cemetery business is more of a sales driven business whereas the funeral business is primarily a service driven business. The primary business strategy for the cemetery business is to build family heritage in our cemeteries by selling property, whose purpose is to provide future sales to other family members. This business strategy is driven in large part by sales of property on a preneed basis through a full time, highly motivated and incentivized local sales team. Approximately 55% of Carriage's recognized Cemetery Revenue comes from preneed sales with the other 45% provided by atneed revenue and financial revenue from several sources including two types of trust funds. Along with the purchases of cemetery property, the families typically purchase merchandise such as markers and monuments, and services,
none of which are recognizable until death and delivery. Preneed sales of cemetery property are recorded as revenue at the time that 10% or more of the sales price is received in cash. Preneed sales of cemetery merchandise and services and the related merchandise and service trust funds are highly regulated by each state. Most states require all or a significant portion of the cash collected held in trust until the cemetery delivers the merchandise and service. The states also regulate when you may withdraw the income earned from the merchandise and service trust funds. The majority of the states allow the income withdrawals only at the time of delivery which has been the primary reason that the income is recognized for GAAP at delivery. Approximately 40% of Carriage's cemetery revenues are generated in
TRUST FUND ACCOUNTING
Carriage will account for this cash withdrawal by increasing Cash and Deferred Revenue by
Since the withdrawn cash is "excess" beyond the state statutory amounts required, the economics of the associated underlying preneed contracts remains "normal", i.e. the costs of delivery are covered by the remaining amounts in trust and a "normal" gross profit and pre-tax Free Cash Flow is produced upon delivery. While the
Non-GAAP Proforma Presentation
Consolidated Free Cash Flow
Attached for review are schedules of various performance metrics for same store trust funds in place as of
PRENEED VERSUS ATNEED BALANCE SHEET ACCOUNTING
Also attached for your review and to help understand the accounting for preneed activities is the Company's Consolidated Balance Sheet as of
The following discussion of these points is intended to educate equity investors as to how senior management and the Board of Directors, as well as our Bank, Senior Note holders, and Convertible Preferred Security holders (TIDES), view the distinction between atneed operations (current cash earnings power and leverage relating to our current credit profile) and preneed operations (well into the future cash earnings power not relating to our current credit profile).
Total Assets for the Preneed Business as of December 31, 2010 of
Preneed funeral contracts that were written in the form of life insurance contracts are not on our Consolidated Balance Sheet based on current GAAP methodology even though they are a very material part of our Preneed Funeral Business and strategy. There is no difference between a preneed funeral contract secured by a trust and a preneed funeral contract secured by a life insurance policy to the customer, but to Carriage we have a greater discretionary ability to impact future investment strategy, asset allocations and returns for our trust funds with our active investment advisor in
As investment income is earned and accumulates on the Preneed trust investments and gains and losses (both realized and unrealized) occur on the Preneed investments, both accruing over time on a contract by contract basis, both the asset accounts and the deferred revenue accounts increase or decrease by exactly the same amount. Because the deferred revenue accounts are shown in the liability section, this means that if our trust investments rise substantially in market value, the liability section that includes Deferred Revenue also rises substantially, which can be confusing without a deeper analysis and understanding of preneed accounting methodology.
The above comprehensive explanation of our preneed and trust accounting, and attachment of Non-GAAP trust fund and balance sheet schedules was intended to make these areas more transparent and to educate investors on the growing cash earnings power and balance sheet strengths of Carriage. Any follow-up questions or comments by readers of this press release or listeners on our related conference call tomorrow morning are welcomed. Please contact
Carriage Services, Inc.
Recap of Discretionary Trust Activity
I. Discretionary Trust Funds (Same Store: January 1, 2008-June 30, 2011)
A. California & Nevada Preneed Cemetery Merchandise and Service Trust Funds Only
Beginning Market Value
Change in Market Value
Ending Market Value
Total Earnings in the Trusts
Recognized Trust Financial Revenue
Recognized Financial EBITDA
Recognized Pretax Income
Less: Cash Income Taxes
Recognized Free Cash Flow
A. All Other Preneed Cemetery Merchandise and Service Trust Funds
Beginning Market Value
Change in Market Value
Ending Market Value